Companies Like Alexander Mining (LON:AXM) Can Be Considered Quite Risky

Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Alexander Mining (LON:AXM) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

View our latest analysis for Alexander Mining

When Might Alexander Mining Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2019, Alexander Mining had cash of UK£195k and no debt. In the last year, its cash burn was UK£467k. So it had a cash runway of approximately 5 months from June 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.

AIM:AXM Historical Debt, November 15th 2019
AIM:AXM Historical Debt, November 15th 2019

How Is Alexander Mining’s Cash Burn Changing Over Time?

Because Alexander Mining isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. It’s possible that the 17% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we’re a bit cautious of Alexander Mining due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Alexander Mining Raise More Cash Easily?

While Alexander Mining is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.

Alexander Mining’s cash burn of UK£467k is about 39% of its UK£1.2m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.

Is Alexander Mining’s Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Alexander Mining’s cash burn reduction was relatively promising. After considering the data discussed in this article, we don’t have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Alexander Mining CEO is paid..

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.